Firm handling Meck small business loans had ‘significant deficiencies,’ audit found 

When Mecklenburg County leaders needed to get aid to small businesses hurt by the COVID-19 pandemic, they turned to a group they already knew: the Carolina Small Business Development Fund.

Last year, the Raleigh-based financial institution launched the county’s $2.75 million small business loan program. And on April 7, Mecklenburg commissioners approved a $5 million COVID-19 small business relief loan fund to be run by Carolina Small Business, in an 8 to 1 vote.

But in picking Carolina Small Business, they picked a firm that, according to a 2018 audit, had material weaknesses in its financial reporting. The audit of the firm found that Carolina Small Business lacked key documents for a number of loans it made, overstated grant support and charged two borrowers fees greater than allowed by the agency that supplied the funds to Carolina Small Business.

Carolina Small Business says its 2018 audit was shared with the county. Mecklenburg County’s Office of Economic Development says it has no record of receiving an audit.

“I just assumed that (county staff) would’ve done their due diligence and brought to us any kind of blemishes or concerns on their record. They could’ve just told us, we’re adults,” said county Commissioner Pat Cotham, after learning about the findings in the audit. She was the sole commissioner to vote against the loan program.

Separately, several county commissioners expressed concern about how much the county is paying Carolina Small Business to operate the fund. The firm will be paid more than $1 million to lend $5 million, a fee that some think could be better spent on getting relief to small businesses.

Carolina Small Business said that it has taken actions to improve its documentation and accounting, including hiring new lending personnel, and that the fees it charges allows it to do more services than a regular lender.

Community development

The Carolina Small Business Development Fund is a Community Development Financial Institution, or CDFI, loan fund. These largely unregulated lenders help get financing to groups traditionally excluded from the financial system, like women and minorities.

In the last decade, Carolina Small Business greatly changed its scope and size under former CEO Lenwood Long.

Founded in 1990 and formerly known as the North Carolina Minority Support Center, it used to primarily help credit unions. Many minority-owned credit unions closed during the 2008 recession, and the organization changed to become a lender.

With grants, capital and additional resources from the state and other financial institutions, including Charlotte’s Bank of America and Goldman Sachs, Carolina Small Business grew into a modest lender. It had $30 million in loans outstanding as of last year, and made 59% of its loans to minority-owned businesses.

With that growth came some mistakes.

The 2018 annual audit of the company by Romeo, Wiggins & Company, a Raleigh accounting firm, found “material weaknesses and significant deficiencies” in the company’s financial reporting.

The firm reviewed 33 of 421 outstanding loans made by Carolina Small Business, and found “several instances” of files missing approvals for loans, files that lacked approvals for loan modifications and two files that were operating under expired modification agreements, according to the audit.

The audit also found two instances where borrowers were charged fees that were larger than what was permitted. After the errors were pointed out, Carolina Small Business returned the excess fees to the borrowers.

Past leadership

Long left as CEO of the fund last year under what he says was board pressure, in part because of disagreements about the direction of the fund. Carolina Small Business declined to comment on Long’s departure.

In addition to the errors in loan documentation, which the organization said it has taken steps to remedy, the 2018 audit found that the firm had “overstated grant support by approximately $804,000” due to an accounting misstatement.

“The buck stopped with me,” said Long, who was CEO for 10 years starting in 2009.

“Paying attention to details was just not there, as much as I had talked to staff about doing that,” Long said. “I was out developing partnerships and out raising funds. When you have things like that happen, it pains you that people you think were doing their jobs aren’t doing them.”

After the audit, Carolina Small Business hired a new CEO, former Charlotte economic development official Kevin Dick, and says that it has improved its controls.

“CSBDF recognizes the need to improve loan file maintenance and post-closing loan servicing,” spokeswoman Janice Rojas wrote in response to questions from the Observer. “Controls have been put in place to minimize the types of errors that were documented in the audit.”

Carolina Small Business has hired a portfolio servicing officer and a senior loan closer in the past year, and revised its lending process. The firm also has implemented monthly monitoring for the accounting of its grants, according to Rojas.

County staff performed “due diligence to ascertain the capabilities of the CSBDF to successfully administer the loan program,” Mecklenburg County Economic Development Director Peter Zeiler told the Observer. He oversees the loan program.

The county did not perform a financial examination of the institution, Zeiler said.

When the first loan fund with Carolina Small Business was established in 2019, the county contacted five organizations which had funds being administered by the firm. “All expressed having positive relationships with CSBDF and satisfaction with CSBDF’s performance,” Zeiler said.

The 2018 audit was shared with the county “prior to our agreement,” Rojas said. Zeiler said that his department “does not have a record of receiving an audit.”

Concerns over fees

At the board of commissioners meeting where the $5 million fund was approved, several commissioners expressed concern about how much the fund would cost to operate, including commissioners Trevor Fuller, Susan Rodriguez-McDowell and Cotham.

Over the 10-year life of the program, Carolina Small Business will be paid more than $1 million.

It will be paid $500,000 in a lump sum to administer the program, and another $500,000 over the life of the program to provide technical support to borrowers. The firm will also collect a servicing fee of 0.5% of the 3% interest on the loan.

“Provision of technical support to small business borrowers decreases loan default and business failure rates,” Rojas said. “Allowing the county to support job retention and growth more effectively while simultaneously improving the overall fund performance by reducing losses.”

Cotham was critical of the fee. “A million dollars. A million dollars could’ve given 100 businesses $10,000,” she said.

Some commissioners considered giving grants to small businesses instead, but state law prohibits counties from doing so.

“Mecklenburg County cannot directly lend to a business owner. We don’t have any choice but to use a third-party lender,” George Dunlap, chairman of the county Board of Commissioners, said at the meeting where the COVID-19 small business loan fund was approved. “We went through an exhaustive process about a year, year and a half ago, to find a company that could do this. Which is a company that Peter (Zeiler) speaks of. So nobody is going to do it better.”

The fee rate paid to Carolina Small Business for the COVID-19 relief program outpaces those under consideration by the General Assembly for a statewide COVID-19 small-business lending program.

That program would cap administrative costs at 5% of overall lending. Including technical support, administrative costs for the Mecklenburg County COVID-19 loan program are 20% of overall lending. The General Assembly’s proposal has no provision for technical support.

CDFIs usually charge higher fees than other lenders because they lend to harder to reach clientele, according to Paige Chapel, CEO of Aeris, a company that rates CDFIs.

Both the county and Carolina Small Business said that if the $500,000 in technical support is excluded, the net administration cost of the Mecklenburg program is cheaper than the General Assembly’s, as that plan allows for the lender to collect more interest income.

“A comparison of the Mecklenburg Program to the NCGA program is inappropriate,” said Rojas, the Carolina Small Business spokeswoman. “Because the NCGA Program is strictly about lending and because the program structure allows for a greater amount of interest income than is the case with the Mecklenburg County initiative.”

Long, the former CEO of Carolina Small Business, thought the fees paid to the firm deserved greater scrutiny. “A million dollars? For a $5-million program? Somebody needs to answer for that,” he said.

Lots of interest

There was little challenge in finding business owners who wanted to tap the $5 million in Mecklenburg County funds.

There already are 270 applicants requesting over $6.9 million, more than has been allotted to the program, according to Carolina Small Business. So far, 27 applications have been approved, according to the county, for $565,697 total.

Carolina Small Business is still taking applications, it says, and will process them first-come, first served, “if and when additional funds become available.”

Mecklenburg County Manager Dena Diorio said she will discuss increasing the loan program’s funding at Wednesday’s commissioners meeting. “Clearly the need far outpaces the funds we were able to provide at that point,” she said at a Monday press briefing.